Tax & Accounting News

Putting Pension Benefits In Trust

05/06/2009

Putting a death benefit – the lump sum paid out to an individual’s loved ones in the event of their death – into trust is a useful way of saving on inheritance tax (IHT), but in order to provide the benefits intended, it is important to keep tax planning up-to-date.

Signing a trust document may not protect the pension permanently if, for example, the pension was a company or group scheme relating to a business the person concerned is no longer involved with, or if a pension plan is moved to another insurer without putting the new policy in trust. In such circumstances, the trust deed that was signed at the time may no longer apply, and it would be advisable to check the situation with the pension company or a financial advisor.

It is also worth bearing in mind who the beneficiaries of a trust would be. Should the worst happen, and an individual dies shortly before they retire, their spouse would be the normal recipient of the tax-free lump sum from their pension fund. However, if the partner concerned is also nearing retirement and looking at minimising inheritance tax, it may be that a big boost to their estate at that stage would not represent good IHT planning.

One answer is a ‘Flexible Power of Appointment Trust’, where the pension lump sum is held on trust and the income it produces is paid to so-called ‘default beneficiaries’, usually the couple’s children. But those trustees are allowed to pay out capital to anyone – including the pension-holder’s spouse – meaning their estate is not boosted all at once, but gradually, as and when needed. These types of pension trust are available off the shelf from most pension companies, usually at no extra cost.

The trust could even be set up to lend money, rather than pay capital to the spouse, saving further tax as the loans would count as a debt, to be offset against IHT.

For more information about IHT planning, please contact us.

 

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